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US Specialty Chemical Volumes Rebound in May: 4 Top Picks

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The U.S. specialty chemical industry bounced back in May after four straight months of declines, according to the latest report from the American Chemistry Council (“ACC”).

Positive May Readings

The Washington, DC-based chemical industry trade group said that U.S. specialty chemicals market volumes rose 1.4% in May on a monthly comparison basis. This follows a record 12.5% decline a month ago and also marks a rebound from declining activity witnessed since January 2020.

Of the 28 specialty chemical segments monitored by the ACC, 22 saw growth in May, an improvement from the declines witnessed across all segments in April. Double digit growth was witnessed across antioxidants, catalysts, rubber processing and textile specialties.

Per the ACC, the overall specialty chemicals volumes went down 14.4% on a year-over-year basis in May. Volumes stood at 95.7% of their average 2012 levels in May, which is equivalent to 2.96 million metric tons. Growth was witnessed in two markets and functional specialty chemical segments on a year-over-year basis in May.

Specialty chemicals that include catalysts, surfactants, speciality polymers, coating additives and oilfield chemicals are used based on their performance and have a specific purpose. They have application in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.

Manufacturing Recovery Instils Optimism

The U.S Manufacturing sector is showing signs of life with a pick-up in activities.  According to the Institute for Supply Management, the U.S Purchasing Managers’ Index (PMI) clocked 43.1% in May, rising 1.6% from April’s reading of 41.5%. Although the May reading still indicates a contraction in manufacturing (a figure below 50% signals contraction), it does point to an expansion in the overall economy after April’s contraction.

Moreover, U.S. industrial production bounced back to a 1.4% growth in May after a record decline of 12.5% in April as most factories resumed operations, at least partially, following suspensions associated with the pandemic. Coronavirus-induced lockdowns and travel restrictions brought economic activities to a near-standstill in March and April. Meanwhile, manufacturing output went up 3.8% in May after declining sharply in March and April, driven by strong gains in motor vehicles and parts, per the Federal Reserve.  

The manufacturing sector serves as a barometer to gauge the overall health of the U.S. economy and has a major influence on the chemical industry. The sector is a major driver for the chemical industry which touches around 96% of manufactured goods. The rebound is manufacturing production augurs well for the U.S. specialty chemical industry.

Reopening of Economies Bodes Well

Companies in the specialty chemical space faced the heat from a significant downturn in demand across certain major industries including construction and automotive during the first quarter in the wake of the coronavirus pandemic. The contagion brought industrial activities to a grinding halt globally, squeezing demand for chemicals. Notably, these companies witnessed demand slowdown in China, a top consumer, as coronavirus-induced disruptions hurt business activities in the country. Some lingering impacts of coronavirus are also expected in the second quarter.

However, with China seeing an economic rebound and many of the major economies around the world gradually opening up, things are looking better for the specialty chemical industry. The reopening of economies in May and June and a return of global economic activities are expected to usher in a better second half for these companies.

After a contraction in the first quarter, China’s manufacturing activities picked up in April and May on a recovery in domestic demand. China’s official manufacturing purchasing managers’ index (PMI) clocked 50.6 in May. Business activities in the construction sector also picked up pace in May. Moreover, China’s passenger car sales rose for the first time in almost a year in May as government stimulus measures revived consumer demand, signalling a rebound in the world’s biggest automobile market from the crisis wrought by coronavirus. Beijing’s stimulus measures are likely to help rev up the world’s second-largest economy in the second half.

Self-help Measures to Reap Margin Benefits

In a challenging environment, specialty chemical companies remain focused on self-help measures, including cost-cutting and productivity improvement, expansion into high-growth markets, operational efficiency improvement and actions to strengthen balance sheet and boost cash flows.

Some of the companies are also taking aggressive price hike actions in an inflationary environment. Specialty chemical companies also remain actively focused on acquisitions to diversify and drive growth. These actions are likely to help these companies to sail through the turbulent times.

4 Stocks Worth a Bet

While U.S. specialty chemical companies reeled under the effects of the virus crisis, a recovery in China coupled with the gradual reopening of economies around the world are likely to bring good tidings in the back half of the year. The rebound in manufacturing activity should also act as a tailwind. Moreover, strategic actions including expansion of scale through acquisitions and continued focus on cost and productivity should help them alleviate any pressure on margin.

We highlight the following four specialty chemical stocks, with a solid Zacks rank, that are worth considering for investment in the prevailing operating environment.

Hawkins, Inc. (HWKN - Free Report)

This Minnesota-based company, carrying a Zacks Rank #2 (Buy), has expected earnings growth of 12.8% for the current fiscal year. The Zacks Consensus Estimate for the current year has been revised 3.1% upward over the last 60 days. It has also seen its shares rise roughly 14% over the past three months.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AdvanSix Inc. (ASIX - Free Report)

Based in New Jersey, AdvanSix carries a Zacks Rank #2. It delivered an average positive earnings surprise of 20.7% for the trailing four quarters. The consensus estimate for the current year also has been revised 4.8% upward over the last 60 days. The company’s shares are also up around 9% over the past three months.

Green Plains Inc. (GPRE - Free Report)

The Nebraska-based company has a Zacks Rank #2. It has expected earnings growth of 52% for the current year. The company also delivered a positive earnings surprise of 20.7%, on average, over the trailing four quarters. Moreover, its shares have shot up around 89% over the past three months.

AgroFresh Solutions, Inc. AGFS

The Pennsylvania-based company currently carries a Zacks Rank #2. The consensus estimate for the current year has been revised 36.2% upward over the last 60 days. The company also delivered a positive earnings surprise of 52.9% in the last reported quarter. The stock has also skyrocketed roughly 173% over the past three months.

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